Here's how payday loan alternative LendUp messed up

BI Intelligence In another blow to the reputation of the US alt lending industry, LendUp is being forced to pay a total $6.3 million in fines, refunds, and settlements after it was found guilty of violating a number of laws between 2012 and 2014, TechCrunch and the Financial Times reports. This includes a $1.8 million fine from the Consumer Financial Protection Bureau (CFPB) and a $100,000 fine from the California Department of Business Oversight. LendUp offers subprime borrowers a short-term loan product designed to compete with payday loans but with the claim of fairer pricing, as well as a credit card called L Card.

Here's what LendUp did wrong:

Charging illegal fees and over inflating interest rates. The company charged customers fees for accessing their loans on the same day they were approved, but such charges are illegal under California law. Furthermore, LendUp charged customers for extending their payment period from 15 to 30 days, which is also illegal. In addition, LendUp told customers that they had to take out an installment loan if they wanted a payday loan, contradicting a law that says a loan provision cannot depend on the customer buying another product. LendUp was also found to have miscalculated interest rates, meaning it charged customers overinflated fees.

Advertising loans in states where they were not available. LendUp advertised its loans throughout the US, when in fact, a large proportion of its loan products were only available in California.

Falsely telling customers that borrowing from LendUp would improve their credit scores. LendUp promised borrowers with low credit scores that if they repaid their LendUp loan on time, it would pass this information on to credit bureaus, thereby improving these borrowers' credit scores. However, in the majority of cases, it never passed this information on, meaning that even if borrowers paid back their loans on time, it made no difference to their credit score.

LendUp has succumbed to a crackdown on payday lenders that was supposed to be its golden opportunity. LendUp markets itself as a fairer alternative to payday loans and high interest credit cards, which are typically the only options available to subprime consumers looking for credit. This means that when the CFPB said back in June that it would get tougher on exploitative payday lenders, LendUp had a tangible opportunity to fill a gap in the market while payday lenders cleaned up their acts. However, LendUp's missteps will likely damage its reputation, making it hard for it to maintain a more-compassionate image relative to payday lenders. The regulators' response also shows that fintechs will be punished with the same harshness as legacy players if they break the rules in a regulated area of finance.

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